Happy holidays to you – to my friends, family, colleagues and clients! Best wishes for a joyous and meaningful season.
Giving Gifts
Now is the time of year for gift giving. I am not just talking about Christmas or Hanukkah presents for family and friends. Instead, I am talking about charitable gifts to non-profit organizations. I am talking about creating trusts, including charitable trusts. I am talking about a deliberate gifting strategy, for making non-taxable gifts to family members.
It is this last gift-giving method I wish to review in today’s article, as the end of the year is a great time for non-taxable gifts (that is, before the year has ended). There exists a $15,000 annual exclusion for 2020, and the same amount for 2021. This means you can gift anyone (and, candidly, effectively everyone) up to $15,000 during the remaining days of 2020, and again during 2021. This gift is not taxable for income tax purposes to the recipient, yet it may be subject to gift tax absent analysis and a deliberate strategy.
A lifetime exclusion of $11.58 million is also available during 2020, with that amount increasing to $11.7 million in 2021. This lifetime exclusion applies to the total amount of money and property you gift during your lifetime, whereas the annual exclusion is up to $15,000 during the year and per recipient.
Gifting as Estate Planning Strategy
From an estate planning perspective, non-taxable gifts are a very effective way to distribute your wealth while minimizing tax liabilities. When you pass away, your estate will be subject to state and federal estate taxes for the property you own and/or control. Because of this, less of your wealth might go to your heirs. Proactive gifting is a smart estate planning strategy, which can benefit your family and friends while simultaneously reducing your estate’s tax exposure. You can give any of your beneficiaries up to $15,000 a year, tax-free. And annual gifting may not only help your beneficiary by providing financial support, but (unlike post-mortem gifting) you can personally witness the good resulting from it.
If you have wealth to spare and you know who your estate will be going to, you can utilize non-taxable gifts each year to slowly distribute your assets over time. You can also reduce your estate’s federal estate tax exposure (and the resulting loss to your family) following your death. It is an excellent way to transfer more money to your loved ones.
What if I Want to Give More?
Though the annual exclusion is only $15,000 per recipient, you may still give more, if you prefer. Financial gifts that exceed that annual exclusion will reduce your exemption amount. Let us say that you would like to gift your granddaughter $25,000 a year. The first $15,000 of that amount is not taxable and falls under the annual exclusion. The remaining $10,000 will reduce your $11.58 million exemption amount by $10,000.
However, given the high exemption amounts, you may have moneys to spare. Moreover, the gift tax is “tax-exclusive” because it is based on the value of the asset being transferred, whereas the estate tax is “tax-inclusive” because it is based on the entire estate (including the assets that will be used to pay the estate tax). Meaning, more can be passed along tax-free by gifting.
Other Non-Taxable Gifts
There are certain gifts that are always considered non-taxable by the IRS, including:
- Charitable contributions, as approved by the IRS*
- Gifts to your spouse (as long as he/she is a U.S. citizen)
- Gifts to cover medical expenses (if paid directly to the medical provider)
- Gifts to cover educational expenses (if paid directly to the education provider)
*In general, donations to charities and charitable funds would not be considered “gifts” by the IRS, but rather charitable contributions for which a deduction is possible.
Developing Your Estate Plan to Include Non-Taxable Gifts
Now is the time of year to consider increasing the amount you choose to gift to your beneficiaries. That said, when you do, it is important to understand the annual exclusion and lifetime exclusion amounts, for a maximum benefit. On a broader scale, non-taxable gifts can be an integral component of your overall estate plan.
To learn more about gifting and to develop a more effective estate plan for you and your family, contact me today, to help you plan for your family’s future.
